One hero product, one supplier: managing concentration risk
Concentration is the most common reason a profitable small store gets a lower multiple. How to measure it, reduce it, and explain what you cannot change.
Many successful Shopify stores start with one product that takes off. That hero product pays for everything else, and for a while it's the whole business. When you come to sell, though, a buyer sees it differently: if that one product stops selling, what's left?
Concentration risk is one of the most common reasons a profitable small store gets a lower multiple. This article covers the main types, how buyers measure them, and what you can realistically do about each.
The four kinds of concentration
Product concentration
The share of revenue that comes from your best-selling product (or product family). When one item makes up half or more of sales, a competitor copying it, a review problem, a recall or a shift in taste can remove a large part of the business overnight. In StoreWorth's model, a top product under 15% of sales is a small positive, while 50% or more is one of the larger negative adjustments.
Supplier concentration
How many of your products come from one manufacturer. A single supplier can raise prices, change minimum order quantities, run into quality problems, close down, or start selling the same product to your competitors. Supplier concentration is common and often unavoidable for small stores, but it has to be managed and explained.
Channel concentration
Most revenue coming from one traffic source, usually one ad platform. This is covered in depth in how buyers see a single-channel store.
Customer concentration
Less common for direct-to-consumer stores, but it matters if a few wholesale accounts or a single marketplace account make up a large share of revenue. Losing one account would hurt immediately.
How to measure your exposure
Pull twelve months of sales and calculate:
- Revenue share of your top product, your top three products, and your top product family
- Share of cost of goods from your largest supplier
- Revenue share by channel, including any marketplaces or wholesale accounts
- Revenue share of your largest wholesale customers, if you have any
Then look at the trend. A top product falling from 70% of sales to 45% over a year tells a much better story than a flat 45%, because it shows the rest of the range is growing.
Reducing product concentration
The goal isn't to sell less of your hero product. It's to grow the rest of the business around it.
Extend the hero into a range. Variations, sizes, refills, bundles and accessories let you use the demand you already have. Customers who love the hero product are your easiest buyers for the next one.
Launch adjacent products deliberately. Choose products your existing customers already need, so you can sell them through email rather than paying to find a new audience.
Track new product revenue separately. Being able to show "products launched in the last 18 months now make up 30% of revenue" is persuasive evidence that the store can develop new products, not just ride one.
Protect the hero. Trademarks for your brand, strong reviews, and product improvements make the main product harder to copy and easier to defend in diligence. Talk to a qualified adviser about what protection is realistic in your market.
Reducing supplier risk
You may not be able to replace your supplier, and you may not want to. What a buyer wants to see is that the relationship will survive the sale and that there's a plan if it doesn't.
- Put terms in writing. Pricing, lead times, minimums, quality standards and exclusivity, if you have it.
- Qualify a backup supplier for your most important products, even if you only place small test orders with them.
- Own your specifications. Keep product specs, packaging files and moulds or tooling documented and, where possible, owned by your business.
- Make the relationship transferable. Introduce a second person from your business to the supplier, keep correspondence in a shared business inbox, and be prepared to make an introduction to the buyer during the sale.
- Keep a history of quality and on-time delivery. If there's never been a problem, you can show it.
Explaining what you can't change
Some concentration is part of what makes the business work. A store that sells one excellent product to a loyal audience can be very valuable. In that case, give the buyer the evidence that reduces their worry:
- How long the product has sold steadily
- Repeat purchase rates and reviews
- Why competitors haven't copied it, or what happened when they tried
- The supplier relationship's history and written terms
- Any product development already in progress
A buyer still prices the risk, but a well-documented risk is priced far less harshly than an unknown one.
Illustrative example. A pet accessories store earns $140,000 SDE, with one harness making up 62% of sales from a single factory. Over twelve months the owner adds a lead, a collar and a travel bowl, sold mainly to existing customers by email, and qualifies a second factory for the harness. The harness falls to 41% of sales while still growing in dollars. The store's multiple improves because a buyer can now see both a range and a backup plan.
Where to start
Calculate your top product's share of revenue and your largest supplier's share of cost of goods. If either is above half, that's a priority for the next year. Your free estimate shows how much product concentration is costing your price today, and the resilience chapter of Raise Your Multiple covers range planning and supplier backups in detail.